How to Battle Expense Report Fraud

Sep 18th 2014
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Expense reports are a fact of life for any business that sends employees to visit clients, other offices, or trade conferences. While most employees are honest and abide by corporate rules, there are enough dishonest ones to make a serious dent in the bottom line. It doesn't have to be this way, though. With knowledge and planning, companies can help curtail this fraud.

The Extent of the Problem

A survey by the Association of Fraud Examiners says that a typical company will lose as much as 5 percent each year in revenue. In more than 20 percent of cases, organizations incurred losses of at least $1 million. The average loss was about $140,000 due to occupational fraud. And the duration lasted a median of 18 months.

So how to tackle the problem? On the most basic level, you should ask these questions:

  • Are expense reports being submitted without original receipts?
  • Do the receipts appear to be altered?
  • How do these expense reports and amounts compare with those submitted by peers in similar positions
  • How do receipts compare with receipts in prior years?
  • Are there any items that appear unusual?
  • Are expense reports submitted on a timely basis?

Taking the Next Steps

That's just the beginning. To really understand the nature of expense reports, read this case study: A sales executive traveled all over the world. Corporate policy stated that the national accounting office would pre-reimburse the employee so the employee would not have to pay out-of-pocket for what could be very large expenses. Upon return, the employee submitted his expense report to his local accounting office rather than to the national accounting office. As a result, the employee was reimbursed again. This failure in internal control caused the company to double pay. In this scheme, it took at least 20 months to detect the fraud.

To avoid this happening at your company, consider these common expense schemes:

  • Over purchasing
  • Fake receipts
  • Fictitious expenses
  • Altered receipts
  • Personal purchases that are charged to the company
  • Double dipping
  • Cancelled expenses
  • Overstating mileage
  • Multiple mileage
  • Threshold manipulation

Think it's hard to fake a receipt? Nope. There are even websites to make it easy. For example, http://www.customrecipt.com can easily produce a receipt that looks genuine. But there are red flags (see Figure 1), such as large amounts paid in cash for lunch, and amounts that end in round numbers.

Figure 1. A fake receipt that looks very good.

Other red flags to consider when reviewing receipts are:

  • Amounts far exceed budget, especially when compared with prior year
  • Receipts don't look proper—they're torn or ripped
  • Dollar amount repetition
  • Corporate credit card purchases that regularly reach or exceed the limits
  • Regularly tardy expense submissions
  • Expenses claimed for phantom employees

To tackle this problem, companies should implement an expense policy and inform employees that the company is on the lookout for fraud. In order to support this policy, employees should receive training in company policies and guidelines. The guidelines should clearly define the consequences of an infraction, and that they include dismissal.

The manager who approves the expense report must question doubtful expenditures and, if necessary, initiate a formal review process. This is in addition to the business rules and workflow that large ERP systems are capable of. For instance, OpenERP/Odoo, PeoplesoftERP and SAP all have the ability to create a process including online submissions of scanned copies of expense receipts. The employee must keep the original and be prepared to submit them for the company for storage. Whoever is in charge of internal audit should conduct annual audits by sampling expense reports.

Every dollar spent on prevention equals to $10 to $20 dollars in savings because the company will not have to conduct an investigation. Furthermore, a risk assessment is something that all companies can do with their teams.

Of course, some executives wonder if teaching employees about fraud will increase fraud. Will this simply teach the "tricks of the trade" to employees?  Actually, employees will be less likely to commit fraud because they will know that there are consequences if they are caught.

About the author:
Ronny Ko is the founder at MyBooks.Solutions where he offers his expertise to clients looking for CFOs and day-to-day bookkeeping, accounting analysis, internal controls, forecasting, budgeting, KPIs, upgrading business processes, software ERP selection, and finance-related analysis to clients of all sizes. He can be reached at [email protected].


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By Tallie
Jun 26th 2015 01:12

Excellent post, Ronnie! Expense fraud is a very real issue and you provide fantastic insight as to how one can combat it. We recently wrote a similar piece on the issue that we feel will supplement your points very well. Check it out and let us know what you think. https://blog.usetallie.com/sca...

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